Dollar slumps after Trump adviser calls euro ‘grossly undervalued’

HiroyukiKachi

The U.S. dollar fell versus the euro and other major rivals Tuesday, extending its year-to-date-decline after a top economic policy adviser to President Donald Trump called Europe’s shared currency “grossly undervalued.”

Traders also were awaiting the conclusion of a two-day policy meeting of the Federal Reserve, which could influence currency trading.

The ICE U.S. Dollar Index
DXY, +0.08%
fell 0.8% to 99.62, but it had traded as high as 100.43 prior to the comments. The trade-weighted ICE U.S. Dollar Index is a measure of the buck against six currencies, with the euro representing 57.6% of the gauge.

With the decline, the dollar index fell 2.5% in January. Despite that, it remains only modestly below levels last seen in 2002.

The WSJ Dollar Index
BUXX, +0.10%
a broader measure of the U.S. dollar against a basket of 16 major currencies, was down 0.7% at 90.48.

“The Trump administration does not adhere to convention, but we don’t know if this is a kind of policy or just the growing pains of an inexperienced administration finding its footing. We don’t know that and it adds to the uncertainty,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

While Chandler said Navarro’s comments wouldn’t have a long-term impact on the direction of the euro, he described the comments as “dangerous.”

“If the U.S. begins violating G-7 and G-20 agreements to let market forces decide currency valuations, that sets a dangerous precedent and it might be harder to hold other countries like China accountable to any kind of manipulation. If we violate it, others have carte blanche,” he said.

German Chancellor Angela Merkel, speaking to reporters in Stockholm after meeting with Sweden’s prime minister, said the euro exchange rate was the realm of the independent European Central Bank. “We won’t exercise any influence over the European Central Bank, so I can’t and I don’t want to change the situation as it is now,” she said, according to Bloomberg.

The euro
EURUSD, -0.2035%
changed hands at $1.0791 from $1.0694 late Monday, a gain of more than 0.8% that brought its year-to-date rise to 2.5%. The euro’s move on the day outpaced the rise that the British pound saw against the dollar. The pound
GBPUSD, -0.3305%
traded at $1.2569 from $1.2497.

The dollar had also been volatile on Monday amid lingering concerns about Trump’s move to restrict immigration from seven countries, which he had designated as states that pose significant or elevated risks of terrorism. Further uncertainty from this issue could stem from Trump ‘s late-Monday firing of Acting Attorney General Sally Yates, who instructed the Justice Department not to enforce the immigration order.

The immigration issue “is causing a huge public reaction not only from the U.S. corporate sector but also from the Republicans. This could prove a turning point for the Trump administration when one looks back at this event in the future,” said Minori Uchida, head of Tokyo global market research at Bank of Tokyo-Mitsubishi UFJ.

As was widely expected, the BOJ stuck to its ultra-easy monetary policy on Tuesday and held back from raising its inflation forecast for the coming year, underlining its nervousness about the uncertain path of Trump’s policy. Investors are now shifting attention to BOJ Gov. Haruhiko Kuroda’s news conference and the central bank’s monthly bond-purchase operation plans.

The BOJ kept intact its policy “as it doesn’t want to make big waves now,” said Uchida.

But investors will read carefully what’s coming. Last week, the central bank decided to forgo a purchase play of its benchmark Japanese bonds, prompting speculation among investors that the BOJ could be scaling back its asset-buying program. By skipping the purchase, the BOJ effectively scaled down the amount of JGB purchase roughly by ¥800 billion.

“This could a sign of some changes. So the investors will monitor whether the BOJ intends to effectively start cutting back the asset purchase,” said Uchida.

There still remain expectations for Trump’s economic plans which had caused the dollar’s rally after he won the election in November, thus absorbing the upside pressure on the yen for now. But “investors need to recognize this can be a factor potentially causing a stronger yen in future,” said Uchida.

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